Wednesday, April 30, 2014

Solarwinds Inc. 1Q14 Earnings: Strong Quarter, Reiterate PT Despite Market Tantrum

Solarwinds Inc. reported 1Q14 earnings yesterday April 29th and held a corresponding conference call market close at 5:00pm EST. Revenue came in at $95.PMM besting our estimate and street consensus of $93.7MM. Non-GAAP EPS came in at $0.41 vs street estimates of $0.36.

Solarwinds kicked the year off with a strong start sighting improvements in the EMEA and Asia-Pacific regions, which were detractors last quarter growing 35% and 41% respectively. The investments the company has been making translated into exceeding its revenue and profitability outlook for the first quarter and put it in a good position to deliver on its full year goals. License revenue was up 18% yoy despite a strong increase in license growth last quarter and a tough comparable yoy. Reoccurring revenue now accounts for 62% of total revenue, which is forecasted to continue growing as the company will likely add to its subscription based portfolio of products.

The company has consistently driven customer retention rates, which are best-in-class across all of their core product areas and geographies. Strengthened by the management adjustments made last year sales team count will continue to increase over 2014 consistent with the pace of their revenue growth. Total employees added over the quarter were 45 in major functions bringing total global headcount to 1,357.

The company reiterated guidance of $409.0MM-428.0 sales and $1.60-1.70 EPS for FY14. Analyst expect EPS of $ 1.61 on revenue of $415.6MM. It should be noted that capex increased to $6.0MM attributable to the build out of their new headquarters in Austin. This will increase operating expenses for the remainder of the year, which is factored into their guidance. Until the company sees positive effects from the initiates that kicked off in late 2013 it will not include the effects in their guidance. Their cautious outlook recognizes that the company has yet to begin to realize impact from a meaningful portion of the incremental investment in their business initiated during the second half of 2013.

To our dismay the stock reacted negatively down ~6.0%. Largely we view the selloff due to the cloudiness sounding the 2013 investment realization akin to a solid quarter by any metric. We are maintaining our PT of $52.00 last raised from $46.00 on 3/3/14. We entered this position at $32.95. Despite the recent sell off we are still up ~20% on the name. Currently the stock sells for 36x earnings compared to 38x historically. Our half position will be monitored carefully as the stock is close to our sweeping stop loss.

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